CFA Society Netherlands: Pre-close calls, an ethical guide for analysts
This column was originally written in Dutch. This is an English translation.
Pre-close calls offer an exclusive look at listed companies, but they also involve ethical risks for analysts. How do you prevent missteps?
By Rik Albrecht, CFA, Director, Chairman of the investment committee at various pension funds, Asset Manager at Roccade Advies, Ethics trainer at Ministry of Compliance, and Member of the Ethics Committee and the Advocacy Committee of CFA Society Netherlands
Pre-close calls are exclusive conversations between listed companies and a select group of analysts just before the quarterly figures are released. These secret calls offer a select group of analysts a price-sensitive look behind the scenes. But therein lies the problem: this information is not available to everyone at the same time and can lead to price fluctuations. This leads to frowns from other investors who do not have an equal opportunity to make a return.
Why are pre-close calls so controversial?
Two important questions need to be answered to determine whether an uneven playing field is created:
- Is the information that is being shared ‘material’? According to Standard II(A) of the CFA Institute, information is ‘material’ if the information can move the price or is important for a reasonable investor when making an investment decision.
- Is the information that is shared ‘non-public’? If only a small group of analysts are allowed to attend and the information is not shared widely, it is absolutely non-public.
Pre-close calls often involve price-sensitive information that is shared within a small circle. It is this combination that creates an uneven playing field, creating the risk of insider trading.
The European regulator ESMA has drawn up guidelines for issuers of securities to prevent the spread of insider information. Okay, but suppose you are an analyst and are invited to such a pre-close call. What then?
Here are some practical tips:
- Do not participate in private meetings. If you notice that a company is sharing price-sensitive information with a select group, step out. Also kindly but clearly indicate that this is not okay.
- Encourage transparency. Encourage companies to issue a press release before the call. Or suggest following a protocol to prevent the distribution of inside information and to give everyone the same opportunity to obtain information.
- Do not use confidential information. What if you do come across material non-public information by accident? Then do not use it. Insist that the company makes the information public as quickly as possible.
- Keep track of your sources. Record where your information comes from. This will help you to show afterwards that your analyses are based on public information.
- Check the rules with your employer. Make sure you are aware of internal compliance rules. If there are none, it is time to insist on improvements.
Why is this important? The biggest problem with pre-close calls is that they can damage investor confidence. If people think capital markets are rigged, they will withdraw their capital. That is bad news for society – less capital, less growth, less prosperity.
In conclusion: pre-close calls are potential pitfalls. But as an investment professional, you do not have to participate in dishonest practices. By acting ethically and advocating for transparency, you are not only helping yourself, but also boosting confidence in the market.